In times of economic downturn, the focus of many companies turns to reducing costs as a means to maintain profitability. Frequently, such cost cutting measures focus on “quick fix” mechanisms such as cuts in fringe benefits, staffing reductions, and business travel cut backs. Often, such quick fix cost cutting mechanisms produce beneficial effects only in the short term as they may lead to coincidental declines in production or resource shortages once market conditions improve. In times of economic downturn, it is often beneficial for modern companies to rethink their cost reduction priorities and focus on improved large-scale cost reduction efforts.
Quick fix cost reduction approaches are still relevant to today's companies, mostly because these approaches are easy to implement and the direct cost savings from the approaches are easy to identify and quantify. However, various innovative companies have identified and successfully exploited new cost reduction actions that can be used to drive significant results by restructuring costs and the way in which work is performed. Such new restructuring actions can include the implementation of electronically enabled integration systems (providing capabilities such as real-time supply chain collaboration, sales force automation, and work force coordination), identifying sourcing alternatives for business functions (such as manufacturing, information technology, and human resources), and using new and emerging technology applications (such as mobile computing and embedded/intelligent sensors). For example, introducing infrastructure changes, such as the employment of electronically enabled communication and integrations capabilities, can reduce costs and improve performance. Such changes can also fundamentally change a company's cost structure so that it is more scalable and flexible in various economic conditions.
Restructuring-based cost reduction strategies, however, are more difficult to implement, have longer time horizons, and thus are more difficult to analyze in terms of impact. These difficulties make restructuring-based cost reduction strategies typically more risky, and, therefore, companies are hesitant to implement or even consider ambitious restructuring-based cost reduction strategies without having carefully and fully researched them and obtained reliable positive forecasts of success.
Generally, business managers are trained to seek guidance by analyzing case studies, which include anecdotal analyses regarding particular strategies that worked or did not work under a certain set of circumstances, that summarize the actions taken and results obtained by similar companies under similar circumstances. To limit the risk in implementing a restructuring-based cost reduction strategy, a business manager generally would prefer to have first identified a case study concerning a similarly situated company, then have analyzed how that similarly situated company had successfully implemented a given cost restructuring plan, and finally have concluded that at least some portions of that plan could be successfully adapted to the business manager's needs. However, many factors limit the usefulness of cost reduction case studies and make meaningful forecasting regarding the impact of cost reduction strategies inherently difficult.
Case studies have the most relevance and usefulness to those companies that have similar situations to the company described in the case study. Unfortunately, the positions of no two companies are absolutely identical. Therefore, in applying a case study approach it is necessary to identify appropriate case studies that have some similarity to and therefore the possibility of some applicability to the target company's situation.
While a comparison of a target company to companies described in case studies can be made using financial data, those in the business community understand that financial data regarding companies, whether public or private, is often provided in various different yet legally acceptable forms that make straightforward comparisons misleading or altogether inaccurate. There are various known financial indicators, measurements, metrics and ratios that are commonly used to evaluate a given company's financial performance and health in comparison to other companies. Two such metrics commonly used for this purpose are Return on Equity (“ROE”), which is defined in Equation 1 below, and Return on Assets (“ROA”), which is defined in Equation 2 below.
                              Return          ⁢                                          ⁢          on          ⁢                                          ⁢          Equity                =                              Net            ⁢                                                  ⁢            Income                                Shareholders            ⁢                                                  ⁢            Equity                                              (                  Eq          .                                          ⁢          1                )                                          Return          ⁢                                          ⁢          On          ⁢                                          ⁢          Assets                =                              Net            ⁢                                                  ⁢            Income                    Assets                                    (                  Eq          .                                          ⁢          2                )            Each financial metric, such as ROE and ROA, has its own use and purpose, and each is more or less suitable and/or accurate depending upon a variety of factors. In the business world, therefore, one commonly examines a variety of such metrics to get a more complete picture of the financial status of a company in comparison to its peers.
Importantly, results from simple calculations of such metrics utilizing publicly available information frequently can be misleading. This makes it difficult to make meaningful comparisons of companies and examine the relative effectiveness of cost cutting policies within different companies because of the inability to gauge the extent of similarity of a target company with a company described in a case study. With respect to many metrics calculated from public information, standardization of these metrics can be difficult due to the variability introduced by Generally Accepted Accounting Principles (“GAAP”) and international differences in accounting practices. While publicly traded companies may be legally required to provide, or may voluntarily provide, various accounting and financial disclosures to assist the public in valuing a company and thus the valuing of that company's stock and/or performance, these disclosures provide data that inherently is subject to different kinds and extents of complex factors that influence the data.
In particular, most publicly traded companies are required to submit financial data on a regular basis to the United States Securities and Exchange Committee (“SEC”) which then publishes this information electronically to the public. Specifically, the SEC requires relatively larger public companies to file registration statements, periodic financial reports, and other forms electronically through the Electronic Data Gathering, Analysis and Retrieval (“EDGAR”) database. The public can access this information for free, such as through a government Internet portal. Financial data on many publicly traded companies is also available through commercial services such as Standard and Poor's Compustat database or Thomson Financial's Global Access database. Many companies also voluntarily disclose various financial data to potential investors and the general public.
While readily available, publicly disclosed financial information and metrics calculated from such information cannot be readily compared among differing companies or time frames due to the lack of standardization identified above. For example, Net Income, as used in Equations 1 and 2 above, is highly dependent on the accounting quality of earning measurements because Net Income is intended to capture non-operating income and expense (such as interest expense) and is, therefore, subject to companies attempting to manage earnings reports. Similarly, there is a wide disparity in the calculation of Net Income from one country to another. Furthermore, Net Income may be misleading because companies that have been highly involved in acquisitions tend to have higher non-cash charges (e.g., amortization) that result in lower new income. In the same way, the Assets and Equity values used in Equations 1 and 2 may vary because of international differences that create a wide disparity in how assets are recorded from country to country. Also, the assets and equity quantities may be misleading because of accounting anomalies, such as acquisitions in which a seller may sell fully depreciated assets to a buyer who must record assets equal to fair value at the time of purchase. Similar problems also exist with the other commonly used metrics of business performance because of GAAP limitations and international differences in accounting practices.
As a consequence of inconsistencies with respect to how different entities report similar matters, it is inherently difficult to analyze and compare data from other companies in an easy, yet meaningful, way. The information from readily available financial statements and filings, such as from the EDGAR or commercial databases, unfortunately is difficult to comprehend without processing that requires a high level of skill and time consuming, expensive labor. Likewise, the complexity and variation in financial statements as described above likewise often makes it difficult and expensive for many companies to analyze their own financial performance. From the standpoint of businesses, it is difficult to identify cost drivers and examine cost cutting strategies because the most readily available and complete financial data is compiled for the purpose of financial statements and tax filings. Given the inaccuracies built into financial data numbers via tax and accounting conventions, companies are left with the non-ideal options of collecting raw data or attempting to use financial data while correcting for any systematic inaccuracies.
Since companies often encounter these difficulties when trying to quantitatively and accurately compare their performance and business situation with those of their peers, they likewise find it difficult to gauge whether certain cost reduction strategies that have been employed successfully by other companies (and restructuring-based cost reduction strategies in particular) will have similar desirable impacts for them. A company considering restructuring to reduce costs needs the ability to accurately compare its financial position and metrics to that of companies the have successfully and/or unsuccessfully employed similar cost reduction strategies. In this manner, more effective use can be made of case studies and trade publications.
Therefore, companies need improved mechanisms for identifying and implementing cost cutting strategies that overcome the inherent difficulties in objectively measuring and benchmarking financial data and metrics (e.g., net sales, gross sales, profitability, market share, research and development expenditures, labor force size, cash holdings, fixed costs, debt load, manufacturing capacity, assets allocation, etc.) that are used to measure and track a given company's respective value drivers and cost levers. A mechanism that allows simplified and objective analysis of the financial performance of a company and meaningful comparison of the company's performance with other companies to permit accurate identification of cost levers and value drivers, and that suggests potential cost saving strategies suitable for the company would provide significant value realization.